Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to today's Q2 2019 Autoliv Inc. Earnings Conference Call. At this time, all participants are in a listen only mode. After the presentation, there will be a question and answer session.
I must advise you that this conference is being recorded today on Friday, 19th July, 2019. And I would now like to hand the conference over to your first speaker today, Anders Trapp, Vice President, Investors Relations. Please go ahead, sir.
Thank you, Valerie. Welcome everyone to our Q2 2019 earnings presentation. Here in Stockholm, we have our President and CEO, Mikael Bratt our Interim Chief Financial Officer, Christian Hanke and myself, Anders Trapp, Vice President of Investor Relations. During today's earnings call, our CEO will provide a brief overview of our Q2 results as well as provide an update on our general business and market conditions. Following Michael, Christian will provide further details and commentary around the Q2 2019 financial results and outlook for full year 2019.
At the end of our presentation, we will remain available to respond to your questions. And as usual, the slides are available through a link on the homepage of our corporate website. On the next page, we have the Safe Harbor statement, which is an integrated part of this presentation and it includes the Q and A that follows. During the presentation, we will reference some non U. S.
GAAP measures. The reconciliations of historical U. S. GAAP to non U. S.
GAAP measures are disclosed in our quarterly press release and the 10 Q that will be filed with the SEC. All the figures in this presentation refers to continuing operations, I. E, excluding discontinued operations. Lastly, I should mention that this call is intended to conclude at 3 p. M.
Central European Time, so please follow a limit of 2 questions per person. I will now turn it over to our CEO, Mikael Bratt.
Thank you, Anders. Looking now into Q2 2019 highlights on the next slide. The second quarter was another challenging quarter where we had to navigate through severe weaknesses in the global light vehicle markets and high raw material costs with reduced profitability as a consequence. Considering the deterioration of market conditions, our operations reported solid results. This is a reflection of the team's commitment, discipline and the actions launched to mitigate the effects from the lower light vehicle production as well as improving launch related costs.
Sharp decline in light vehicle production was more than offset by continued growth from recent launches. This quarter marks the 5th consecutive quarter of substantially higher organic growth compared to the market. In this quarter, we outperformed light vehicle production by more than 9 percentage points. Order intake remained on good level, securing a strong order book and supporting prolonged outperformance of light vehicle production into the future. We note though that the sourcing activities was relatively modest and the majority of expected industry sourcing for this year is planned to take place in the second half of the year.
Excluding EC antitrust payments in the quarter, we had a solid operating cash flow, enabling us to exceed last year's level for continuing operations for the first half of the year. I am generally pleased with how we managed the sharp decline in global LVP by the cost reduction actions well implemented and are we are planning for. Furthermore, I see both room and need for additional improvements in certain areas. So what are we doing to address the ongoing market weakness? On top of what we said after the Q1, we initiated a number of additional cost improvement actions.
We have sharpened the purchasing activities. We have reduced launch related costs versus Q1. Direct workforce headcount was reduced by 1200 in the 2nd quarter. And we will continue to adjust the direct workforce in line with market development. And we have begun accruing for reductions for indirect workforce.
Finally, as we continue to evaluate our global operations, we have identified further structural cost improvement opportunities and this will likely result in additional restructurings in the future quarters. So what are we doing to address our long term opportunities? Rest assured that the situation of the market conditions have not changed our long term improvement focus. On the contrary, we have accelerated efforts and investments to build the foundation for improving the entire value chain such as flexible optimization, digitalization, engineering efficiency and footprint optimization. Looking now at the recap of our 2nd quarter financial performance on the next slide.
Our consolidated net sales declined around 3% compared to Q2 2018 impacted by weaker currency with organic sales increasing by close to 2% despite the global light vehicle production falling by more than 7%. Adjusted operating income, excluding costs for capacity alignment and antitrust related matters, decreased by around 20% from $230,000,000 to $183,000,000 impacted by lower light vehicle production, raw material pricing and product mix. The adjusted operating margin decreased by 190 basis points to 8.5 percent compared to the same quarter of 2018. Adjusted EPS decreased by $0.84 compared to Q2 20 18 almost entirely due to lower operating income and higher income tax as the tax rate last year was positively affected by one time valuation items. Looking now on the market development.
The negative trend that started around a year ago has continued into the first half of this year. In the Q2 of 2019, global light vehicle production is estimated to have fallen by more than 7% according to IHS, the worst quarterly performance since the financial crisis in 2,008, 2009. China's new light vehicle market contracted for the 12th straight month in June. Despite dealerships in many provinces provided generous discounts to reduce inventories ahead of changes in emission routes. According to CAM, light vehicle sales dropped 14% in the quarter, while LVP declined by 17%.
This indicates a reduction in inventories during the quarter. In June, U. S. Light vehicle sales finished higher than expected for the 2nd straight month. Light vehicle inventory bounced back to near year ago levels despite the strong May June sales to $4,000,000 As a result, light vehicle production in North America decreased by 3%, which was 1 percentage point lower than the region forecasted at the beginning of the quarter.
Europe's light vehicle registration was 3% lower than the same period in 2018. Light vehicle production has slowed even more as many OEMs last year prebuilt vehicles ahead of the WLTP introduction. The LVP decline was concentrated to the important West European market that dropped 10%, while East Europe production was virtually flat. With the U. S.
Market yet starting to drop, we are in a situation today where the 3 of our 4 major markets are declining. Looking to our sales growth on the next slide. Our sales continue to substantially outperform global light vehicle production, outgrowing light vehicle production in all regions except Japan, where we do expect outperformance to begin later in the year. In the quarter, North America contributed with $72,000,000 to the organic growth. The sales were driven by product launches from previous quarters mainly with Honda, Nissan and GM.
The organic growth of around 11% was 14 percentage points higher than the change in light vehicle production. Our sales in South America increased by 21% organically, substantially outperforming LVP. In Europe, we have been affected by weaker demand from a number of OEMs including Daimler, Renault and BMW. Despite a negative mix with the important Western European markets virtually accounting for all of the region's market decline, our sales decrease was in line with the region's light vehicle production. Sales in China declined organically by 3%, outperforming light vehicle production by 14 percentage points.
The lower sales were mainly as a result of our sales to domestic OEMs declining by more than 20% organically. This was partly offset by higher sales to global OEMs, which increased organically by 4%. The growth with global OEMs was largely due to strong performance with Honda, VW and Toyota. Sales in Rest of Asia outgrew LVP by 11 percentage points. Growth in Rest of Asia was mainly driven by Honda Kia in South Korea Suzuki in India and Toyota in Thailand.
Looking to our key model launches 19 on the next slide. Here you see some of the key models launched during the Q2. These models are well distributed across the globe and have autolip content per vehicle from US100 dollars up to US500 dollars per car. Particularly, it is interesting to see 2 new vehicles launched with dual frontal knee airbags. This shows that car manufacturers are more and more focusing on prevention of injuries to occupants' legs and knees.
Going into the second half of the year, we again have a high level of launch activities to support new vehicles to be introduced over the coming quarters and that will prolong outperformance of LVP. I will now hand over to our Interim CFO, Christian Hanke to speak to the financials.
Thank you, Mikael. Looking now to our financials on the next page. We have our key figures for the Q2, including negative currency translation effects of around $90,000,000 and organic sales growth of $34,000,000 our consolidated net sales reached $2,200,000,000 dollars Our gross margin declined year on year. The net operating leverage on the higher sales was more than offset by higher commodity costs. Additionally, we experienced lower capacity utilization in most regions due to the sharp drop in light vehicle production and costs to support the long term margin expansion.
Adjusting for the impact of the social unrest in Mexico, gross margin improved slightly from the Q1. Our adjusted operating margin of 8 0.5% declined year on year, mainly due to the lower gross profit and the slightly higher RD and E and SG and A in relation to sales, although they were virtually unchanged in absolute dollar amounts. Our adjusted return on capital employed and return on equity were 20% 24%, respectively. We maintained our quarterly dividend unchanged at $0.62 Looking now on the next slide. Our adjusted operating margin of 8.5% and was 190 bps lower year on year.
As illustrated by the chart, the adjusted operating margin was negatively impacted by higher raw material costs of 90 bps, 30 bps from SG and A and RD and A and by 20 bps from FX effects. The costs related to the first quarter social unrest in Mexico amounted to US3 $1,000,000 in the second quarter. As we explained in the previous earnings call, mature products have higher profitability than recently launched products. So the sharp decline in LVP brings down sales of the higher margin mature products, which from a profitability point of view is not fully offset by the growth of the lower margin recently products that are in the early phase of the product life cycle. This has resulted in a period with the product mix carrying a lower profitability.
Looking on to the next slide. Excluding the $203,000,000 EC antitrust fine that was paid in the quarter, operating cash flow was strong and amounted to 182,000,000 dollars 19,000,000 lower than for continuing operations in 2018. Year to date operating cash flow has increased by 54,000,000 dollars compared to last year on a comparable basis. Capital expenditures amounted to $128,000,000 in the second quarter, which is about 5.9 percent in relation to sales. In the Q2 of 2018, capital expenditures for continuing operations were $125,000,000 or 5.7 percent end of sales.
However, the full year 2019, we expect capital expenditures to decline in relation to sales as the ratio begins to normalize. Excluding the EC antitrust fine, free cash flow for the last 12 months of $375,000,000 indicate an 83% cash conversion on net income. For full year 2019, excluding any discrete items, we expect our operating cash flow for continuing operations to be around $700,000,000 to 800,000,000 dollars Looking now to our earnings per share on the next slide. We have the EPS development. Reported earnings per share there declined by $0.95 to $1.25 The main drivers behind the decrease are around $0.11 from higher cost for capacity alignments, approximately $0.39 from operating profit and $0.44 from unusual tax $4 from unusual tax items last year, while the tax rate in Q2 2019 was in line with our projected full year tax rate of around 28%.
In Q2 2019, the adjusted earnings per share decreased by $0.84 to $1.38 from $2.22 for the same period 1 year ago. Looking now to our financial position on the next slide. We have, as you know, a long history of a prudent financial policy. Our balance sheet focus and the shareholder friendly capital allocation policy remains unchanged despite the market conditions. Outlived policy is to maintain a leverage ratio of around 1 times net debt to EBITDA within a range of 0.5 times to 1.5 times.
As of June 30, 2019, the company had a leverage ratio of 1.8 times, which is 0.2 higher compared to the 1.6 we reported from March 31. The main reason for the increase is the payment of the fine for the remaining portion of the ECN investigation as we communicated in our prior call. Our strong free cash flow generation should allow deleveraging and should allow continued returns to shareholders while providing flexibility. We aim to be within the range target range by year end despite the fine from the EC investigation and other market challenges. This excludes any other discrete items and other non foreseeable changes to our business.
Looking at market development for the rest of the year on the next slide. The outlook for major light vehicle markets has become increasingly more uncertain due to weaker consumer confidence, trade tariffs and regulatory changes. According to IHS, the North American light vehicle production is seen as slightly down in the second half of the year, while LVP in China are expected to continue to decline, but at a more modest rate than what we have seen in the first half of the year. Since January, IHS has reduced their full year 2019 expectations of global light vehicle production by close to 5,000,000 units or by 5 percentage points to below 88,000,000. The current U.
S. Light vehicle inventory remains at levels suited for a $17,000,000 plus SAAR. This adds additional risk to the LVP outlook in North America. End of June, the European Automobile Manufacturers Association revised its forecast for the 2019 European passenger car registrations downwards by 2 percentage points minus 1, citing uncertainty due to Brexit and changing macroeconomic conditions. This indicates an even weaker second half of the year, putting further downward pressure on LVP plants.
In China, inventory levels have come down, bringing a glimmer of hope. However, we have not seen any change in the recent downward trend in light vehicle sales despite steep discounts at dealerships. Reflecting the increasing uncertainty in the market, our base scenario for global light vehicle production in 2019 is a decline of 4 percent to points for the year. Turning the page. We have summarized our full year 2019 indications.
The uncertainty remains high in a falling market and we currently do not see any signs of a turnaround in light vehicle demand and therefore we now indicate a lower full year 2019 sales and profitability. Full year indications assumes mid July excludes costs for capacity alignments and antitrust related matters. Our financial outlook assumes a 4% to 6% decline of global light vehicle production. The range reflects the continuing high level of uncertainty in the automotive markets. We expect our organic growth to be 6% to 7% higher than global LVP.
Consequently, our full year 2019 indication is for an organic sales growth of 1 to 3 percentage points and a negative currency translation effect of around 2%, resulting in a change of consolidated net sales between -one percent to plus 1% for 2019. Our indication for the adjusted operating margin is 9% to 9.5% for the full year 2019, reflecting the sales growth range. We expect 2019 raw material cost to increase by approximately 70 bps. We anticipate the currency effects on the operating margin for the full year 2019 to be neutral. The projected operating cash flow excluding EC antitrust payment and any unforeseen events is expected to be in the range of €700,000,000 to €800,000,000 I will now hand back to Mikael.
Thank you, Christian. Turning the page. To summarize, I would like to share with you what we are doing to address both the near term market challenges and the long term opportunities we see. But first, I want to remind you what we did during the financial crisis in 2,008 in product development. The result of these investments gave Autoliv a clear competitive advantage when the market rebounded again and was a key factor behind our market share gains after the financial crisis.
Now despite uncertain market development, we are accelerating investments in a similar way, building the foundation for top line and margin expansion short to long term with many focus on efficiency step changes across the whole value chain. We will continue to adjust the direct workforce to the market situation as a part of our ordinary course of business. While sales remained on similar levels as in the Q1, we reduced the direct headcount by 1200 in the second quarter. The reduction is to support margin improvement in the second half of twenty nineteen. We have initiated actions to reduce indirect headcount by approximately 5%.
We are closely managing tariffs in place today such as 232 and 301, while monitoring potential new tariffs. By implementing a number of actions, we expect to be able to mitigate the vast majority of the potential €30,000,000 costs that the new tariffs otherwise would amount to in North America alone. As launch related issues continue to decline, we can now refocus some of our resources on productivity improvements instead. There is both need and room for improvement in certain areas. One example is in Europe, where the severe decline in the market, driven at least partly by new emission legislation and some consumer uncertainty regarding drivetrains.
Brexit combined with our footprint have created challenges that we have to address. To offset high raw material costs and continued price pressure, we have launched a new competitive sourcing process covering 75% of current purchasing spend. For medium to long term gradual improvements, we have a number of initiatives such as automation and digitalization for increased efficiency and productivity. We expect to start out our first pilot Factory of the Future in the second half of twenty nineteen with plans for a gradual rollout from 2020. Streamline product design and engineering to speed up new launches and improve engineering efficiency review our footprint to meet future demand.
We will provide more details on continuous improvement agenda in our upcoming Capital Markets Day, which brings us to the next slide. Our Capital Markets Day will be on November 19 in Salt Lake City area in Utah, USA. The event will showcase our full potential and provide an update on our 2023 strategy and development of the Autoliv Group. Additionally, we will show future products, give an update on opportunities in core and adjacent product areas, outline potentials that we see in flexible optimization and digitalization and much more. I hope to see you all there.
And I will now hand back to Anders.
Thank you, Mikael. Looking at the next page, we this concludes our formal comments for today's earnings call and we would like to now open up the line for questions. So I will now turn it back to Valerie.
Thank you, sir. And your first question comes from the line of James Picariello of KEB Capital Markets. Please go ahead. Your line is now open.
Hey, good morning, guys. Good morning. So just touching on your full year light vehicle production forecast now, it's now down 4% to 6%. It looks like you're straying away a bit from IHS, which I believe is down they're forecasting down 3.7%. So, yes, just what's driving that?
And what are your can you just talk about your expectations for the second half by region?
Yeah.
We I think first of all, you should see that the range indicates it's the high uncertainty in the marketplace. And it's correct that IFS came down here now with the last revision they did early in the week. And we feel that on top of what they indicated here that there is still a very high degree of uncertainty when we listen to our own organization here and how they are being updated by our customers here. So of course, China to start with is where we see the biggest downward pressure and that's what you have seen throughout the year. Europe likewise for the same reasons here.
And we have now started to see somewhat weaker U. S. So when you look at the totality for the remaining of the year, I think you should see the same time of relation between the different regions here. So it's not that we indicating that we see a bigger drop in 1 of, let's say, Europe or U. S.
Here than what we have seen. So in relative terms, it's the same pattern that we have seen in the beginning of this year, but it still continue to weaken. I think that's the message from our side here.
Okay. And then just on within your revised guidance here for the second half from a margin perspective, can you just help walk through what drives the second half improvement to launch costs go completely away, the Mexico labor issue 15 basis points in the quarter maybe that goes away. But yes, maybe just sequentially how you're thinking about the margin trajectory in the back half and what drives that? Thanks.
Yes. No, I think, first of all, it's the cost measures that we are implementing and have implemented. You may recall already in the lowest earnings call, we indicated a number of actions that we were working with. And you can see, for example, now that the adjustments to the lower volumes in certain plants here resulting in reduction of 1200 people. And we will continue to focus and secure that adjustments continues as we move forward here.
And on top of that, we have also added now the target of reducing and adjusting our indirect labor force here with around on 5%. So we are stepping up, you could say, our cost reduction initiatives in the short term here. We also believe that we will see improved raw material situation here as we move forward in the coming quarters. And of course, we also have the seasonality where we have a stronger second half and I would say especially a stronger Q4 as a part of our normal pattern here. And then just to confirm what you stated yourself here around Matamoros that is not with us in the second half.
And we have also launch costs following the plan where they are gradually being reduced throughout the year. So we are following that plan. So I would say that's probably the main five factors to see an improved second half.
Thanks, guys.
Thank you. And your next question comes from the line of Vijay Rakesh of Mizuho. Please go ahead.
Yes. Hi, guys. Just on China, obviously, you talked about second half looks like might be flat year on year. But any thoughts as you look out into next year? Do you think some of these emission headwinds start to go in the rearview mirror and you start to see some growth?
Or there are some fundamental headwinds in China?
Yes. I think to be too certain about the development in China for 2020 is certainly too early. But I mean, if you look into the Q2 here, the emission change that took place basically as now of July 1st here will go away here. So that challenging factor is not part of 20 20 here. And I think we should remember here also that, that change that now took place was not known when we're sitting here in April.
That was something that were decided by the Chinese authority as late as in May here. So that of course made the Q2 even more complicated here. But I think that the underlying factors that we have described earlier here around the driveliner meaning traditional versus the electrical vehicles is still there. The overall mobility development in China, especially the mega cities there. But also the underlying economic development that is right now affected by the trade wars and all of such uncertainty connected to that.
So I think there is many factors driving the development in China right now. And in what way they will gradually be solved so strategic is very, very
the any headwinds with RD6 or Brexit? How do you think that plays out because there's been some manufacturing relocations there? Thanks.
I think it's the same there. I mean, Brexit, we, of course, take all the measures we can to have difference working according to different scenarios here. And you could say we had a practice on that early this spring and now it was moved forward. So it's continuing with that work. And here, I think also it's very hard to say where we will end up here.
But we definitely feel and see a weakening market here as well.
But I think, Michael, on the RD and A, we don't believe that that will have a big impact similar to WLTP. So I think we probably can say that based on
what we know. That's correct. No. And I think that was the question also on previous quarter here, potential impact there. But so far so go down in the
same. Thanks.
Thank you. And your next question comes from the line of Anthes Adeelou of Amdamn Bank. Please go
ahead. Regarding this 1200 people that you have already ended working contracts for, how much is that due to that you are phasing out launches process and the ramp up? And how much is like capacity adjustment? And second question is related to this 5 percent on the HealthCount further on. Is it equally spread between U.
S, Europe and China? And is there an element of temporary contracts? Or should we expect one off shortages for this? Thanks.
Yes. I think on thank you, Anders. On the first question around the 1200 people, I would say, majority of that is connected to capacity adjustments here. But to your point here as launch costs start to come down as a result of the improvement activities we are doing can also steer resources towards traditional productivity work even harder and that is being done. But I would say that kind of resource allocation then is more on the indirect side.
And then the 5% that we are targeting here is, I would say, a global number, of course. And we're addressing all indirect areas here. Exactly how that will be played out in terms of number per country or region and functions, we can't state here. Now we are working with all the tools in the tool box here to realize this number here. And we will, of course, also have some one time charges here.
And you have seen some of these charges already being booked now in the second quarter here.
Okay. But will it be part of a big program? What should we expect like each quarter a specific amount or?
I wouldn't like to call it a program because this is activities we need to address as we move forward and drive the productivity in combination of course with adjustments to the market development here. And there will be charges depending on which way, so to speak, that we are realizing these targets here. I don't know Christian if you have anything to add to that.
No, no. I mean I think you're absolutely right. I mean we're monitoring the way the market is moving. In terms of the indirect labor, we have these local rules and regulations to deal with. So I mean, I think we have recorded as much as we can in the second quarter and we'll probably see some more spillover in the second half of the year.
But it all depends on which means that we at the end of the day ends up with. And of course, on the direct workforce there we have a high degree of temporaries as we have indicated before also. So we have a fairly I mean, we have a good flexibility in that area. Thank you.
Thank you. Your next question comes from the line of David Lecker of Kepler. Please go ahead. Your line is open.
Good afternoon, everyone.
Hi, Sam. Hello.
Two questions here. If we look at the slide of quarter 2 key model launches, that's a great list and it's helpful. Can you I was wondering if you could some color to that and give a couple of examples of how your content might have changed on one of these vehicles versus the previous version of those?
I think when it comes to the content here, as we pointed out in the presentation here, I think the interesting part is how we see more the airbags being implemented to the vehicles indicating that and I mean supporting what we have described here before as content continue to increase also in the mature markets. And of course, secondly here, we see also new type of car, new cars and new cars for us. So if you take the Mazda CX-thirty, it's a new car for us. The Cadillac XT6 is a new car. And the Nissan Symphony is a new car for us.
So there we have taken a bigger portion of that business. Also I will say that the Jeep Gladiator is a completely new car. So in short, you see a lot of new car models coming through here where we have a high participation in and content per vehicle is at very good levels and with, I would say, new types of airbags with the example of the knee bags.
Okay. Great. And then Autoliv has a track record history here of engineering recoveries that tend to be more heavily weighted to Q4 than others. Is there any insight you can give us in terms of how we should be looking at that as it relates to the Q4 of this year?
I think I can only confirm what I said before here that its seasonality is supporting a stronger second half and especially Q4. And what you're alluding to here around engineering income is one of those. So that's correct.
You would expect it to be not that pattern to be not any different than last year in terms of magnitude?
No. You would see the same pattern, yes. Okay. Great. Thank you.
Thank you.
Thank you. And your next question comes from the line of Joseph Fak of RBC Capital Markets. Please go ahead.
Thanks and I guess good afternoon over there. The first question is, I was wondering, can you provide an update on the order intake win rate? I know it had been running about 50%. And then I guess just as you look to the second half and you mentioned you expect more sourcing there. As you start to look at some of those programs, are you seeing any pricing change on some of those new potential programs or more productivity requirements on existing biz in order to secure that business, especially given Joyson's regrowing presence?
When it comes to the share of new orders, we don't give you the numbers quarterly here. We only do that on a yearly basis. But we continue to see good order intake even though the activity has been relatively low. But good order intake supporting a strong order book here. So I think that's what I can say in regards to that.
Do we see increased price pressure and a tougher market? I would say that as always the automotive industry and the supplier business here is a very competitive and has always been. And of course, when you look through the industry here, you have seen some more challenging requests from some of the OEMs. But I would say all in all, we are on a stable situation here. So I wouldn't say that it has dramatically changed in that direction.
But of course, if you take anecdotally some OEMs there, of course, you can feel some pressure. But all in all, I would say stable, but as always challenging industry.
Sure. Thanks. That's helpful. And then just on the margins, I know you sort of addressed the second half ramp a little bit. Like, I guess, it would be helpful if maybe you could either quantify the launch cost benefit or the headcount reduction benefit.
But the other thing in particular that I was wondering about like you say on slide 9 that launch costs already improved in this quarter from the Q1. And if we back out sort of the Mexico headwinds from both quarters, it looks like both quarters were around 8 0.7% operating margin, so pretty flat on a similar level of sales. So if launch costs really did improve from 2Q to or from 1Q to 2Q, what was sort of the offset that kept the margins flat?
I think first of all, you saw the raw material higher than what was in the Q1. And I think also currency is one that you can see there on the chart. So I think we feel very comfortable that the launch cost and the activities that we're doing to reduce the headwind here is offsetting some of these things.
So like how much of the back half improvement is due to lower launch costs?
We are not quantifying that and we have never really quantified the launch cost altogether here. But as we have indicated, it has a gradual improvement throughout the year. So I mean, now we are half through here. So I think it feels comfortable that we're expecting to be completely out of that this year.
Okay. Thank you.
Thank you.
Thank you. And your next question comes from the line of Brian Johnson of Barclays. Please go ahead. Your line is now open.
Thank you. This is Jason Stuhldreher on for Brian. I just want to come back to the guidance because and I know it's been asked a lot, but if I look at the step up and you back out sort of the incremental margins from revenue, it still implies about a 90,000,000 dollars improvement in performance from 1H to 2H, which is roughly 2% to sales or so. And so I know you want to stay away from quantifying, but I think it would be helpful to understand of that $990,000,000 and that's a rough number. Is that I mean is it pretty proportional that we're going to see that between headcount savings and then raw material savings?
And the only reason I ask is if we look at SG and A plus RD and E, that's about 11% of sales. So I think 2% out of that would be fairly aggressive. So if we could just get sort of a fifty-fifty or a 1 third, 2 thirds between material savings and headcount. Is there any color you could provide there at all?
I'm sorry, but I think I have to refer to my comments before here about, let's say, the 5 main levers here to drive the performance improvement or the EBIT improvement here for the second half. And I mean, of course, the Matamoros effect you have seen in the Q1 here. And the Q1 and the Q2 raw material you have there also. But we are saying it's improving. We're not saying that it will be eliminated here.
So we will not go into quantify these levers here.
Okay. That's fine. Okay. And then second question. I just to talk about the product mix, I understand there's an element of product mix where your more mature programs were rolling off at a higher margin than the new programs.
And I just want to touch on this because it's something we've heard from a lot of suppliers. So I do understand then that new programs tend to come on at lower margin and then improve over the life of the program. But that does imply that last year's business should be coming on more profitable this year and that this year we should be seeing an element of performance in that year over year walk. So my question is, do we see that incremental performance this year or this quarter from last year's business becoming incrementally more profitable? Or conversely, are new programs just generally coming on at lower margins?
And I guess to put that more bluntly, in the period of growth over the last 3 to 4 years, was the industry or you simply over earning on certain programs and now in a flat to declining production environment we shouldn't expect that?
I think you have the wrong assumption there in your reasoning around the different programs here. It's not so that the old are better than the new ones, etcetera. What we are talking about here is in the ramp up phase of new program, it has lower profitability or earning as they are maturing through the launch process here. So as we have come into the what we will call it refer to that as the wave here, meaning the step up in our market share, we have a higher proportion of launches our total portfolio which has a short term negative effect. So it's not a question about the new program has low profitability altogether.
It's a pure timing of this is the timing of the new program as I indicated here. And that has been true for as a part of our industry. So it's nothing new. It's just that we have a higher portion of launch programs versus the mature programs that now is breaking at 7% in the quarter as a part of the light vehicle production. So that's the difference.
Okay. Thank you.
Thank you. And your next question comes from the line of Chris McNally of Evercore. Please go ahead. Your line is open.
Thanks, gentlemen. Good afternoon. Maybe just a follow-up. I appreciate the detail on the type of the headcount reductions. Just maybe just a simple question.
Were they taken during the quarter? Meaning, do we get some of the benefit in Q2? I imagine it would take some time for it actually to flow through. So the majority would be in second half. But did we receive any benefit from the headcount specifically in Q2?
Yes. I think I mean the 1200 have gradually been taken being reduced throughout the quarter. So of course, it's not full effect of 1200 people in the quarter. So that has been a timing question on that. And then when we go forward here, the 5% as we're talking about on the indirect, It will also have a gradual effect and it depends on which region and so forth that have a longer lead time to execute on those things.
So it will have a gradual implementation. And of course, as we adjust on the direct workforce, it's the same as we have talked about here in the Q2. So that is a timing question there.
No, that makes perfect sense. And then just a broader question. I mean, I think we've all seen the revisions that continually happen for sort of all suppliers versus IHS and everyone seems to realize it might be a lagging indicator, so they're a little bit more cautious. I mean as you sit here today, what maybe you could talk by a region or a segment or a mix. I mean, where do you think the incremental upside or downside is?
I mean, what sort of keeps you up at night in terms of now that we sort of have the updated call into the callouts for the back half of the year, what are you watching for the second half for things to get better or worse?
No, I think I mean for us the focus is to be flexible and agile whatever we'll see coming through from the underlying development here of the market. I think as I said before here, I mean, the uncertainty is so high hence then that we are giving a range rather than a round number here. So we just need to make sure that we are staying alert and make the adjustment as needed.
Okay. Much appreciated. Thank you.
Thank you.
Thank you. And your next question comes from the line of Alexandre Verdi of Kepler. Please go ahead. Your line is now open.
Thank you. Good afternoon. I have two questions please. The first one is on the EBIT bridge for the full year. I remember in Q1 you quantified the raw math headwind at 60 bps.
Is it still what you expect?
On the raw material, we have upped that to 70 bps as a consequence of the raw material increase we have seen here in the Q2 that was slightly higher and also what we expect for the rest of the year. So net net of that is 70 bps now.
Okay. Thank you. And second question is on the cycle. So I know visibility remains extremely limited. But I mean what are your expectation for global production for next year?
I know that one of your competitors expect a flat environment between 2019 2021. So at this stage, what's your view? Do you expect a rebound next year? Or will you stay quite cautious?
I think it's too early to call on that now. I think first of all, we need to see how the second half develops here and we need to have more visibility in order to judge that. There's so much moving parts out there that we need to have a resolution on I think. So too early to say.
Yes. It makes sense. Okay.
Thank you.
Thank you.
Thank you. And your next question comes from the line of Jaram Nathan of Daiwa Securities. Please go ahead.
Hi. Thank you. Thanks for taking my question. So I had a question regarding your longer term efforts on digitization and automation. So just peeling back the onion here behind the financial statements, can you talk about some operational metrics you're targeting and
that you should do you
think that can improve with these?
No, I think we will see if we come back to some KPIs or metrics around that later on. But what we really want say here is that we see great opportunities throughout the value chain as we move forward. And we don't see any reason why we should slow down those effort. It's rather the opposite here. And the message here is that we're trying to speed them up and gain the benefits earlier here than maybe originally anticipated here.
So we have highly focused agenda on driving the going forward here. And this is an area where we see good opportunities and that's why we wanted to point it out. It's all there to drive productivity. So that's the ultimate matrix of course
was. Okay. Thank you.
Thank you.
Thank you. And your next question comes from the line of Ron Slach of Wolfe Research.
This is Dan Galves in for Rod. Our question is around kind of the general financial health of the industry after 4 quarters of lower global production in a row. There's been some news on financial stress of some local Chinese OEMs. Some of your peers have talked about balance sheet weakness in the Tier 2 base. How do you guys monitor this?
Are you seeing any warning signs? And is it impacting your ability to generate productivity improvements through the course of 2019?
Yes. I feel that we have a robust purchasing organization, supply chain management organization into monitoring any risk we may see from our supplier base. I can't say that I I mean, of course, I understand what you're referring to and what you see. But in our case, I would say it's not any troublesome situation there. It's something we are keeping a close eye on, but we haven't seen any really changed situation there.
So I don't feel very concerned about that from our side and our perspective. But of course, that's something that we are closely monitoring for sure.
Okay. Thanks. And then just one quick one on first half to second half raw materials. Are you expecting improvement in raw material costs versus the first half or just a reduction in the headwind?
It's basically a reduction in headwinds. That's the way you should see it.
Okay. Thanks a lot for taking my questions.
Thank you.
Thank you. And your next question comes from the line of Andrea Abuchakar of 1 Investments. Please go ahead.
Hi, good afternoon. Thanks a lot. I have a quick one regarding model launches. How many launches you had so far in H1 or at least how what was the year over year increase versus last year? I remember last year Q2 was over 70% growth of number of launches year over year?
And the second part of the question, how should we think about H2 launches versus H1 in terms of proportion over the total portfolio for Autoliv? Thank you.
No. We have in sequence here a much more stable situation when it comes to the number of launches. But as you can see, we continue to outperform the market as a result of the launches we have and the market shares that we are taking in the different programs here. So and of course, that's the end perspective. And I think also when you look at the year over year improvement increase of launches, we had a step up of 20% from 2017 to 2018.
And this year, it's much, much lower step up. It's more I would call it flat plus so to speak in number of launch options.
Right. Will it be the case for H2 as well?
Yes. Okay. So stay in situation.
Okay. Thank you.
Thank you. And your next question comes from the line of Erik Pervolsen of Pareto Securities. Please go ahead.
Yes. Hello. You touched upon it a bit already, but is it possible to quantify the number for cost savings for the reduction of the indirect workforce of roughly 55%. Is it possible to do that?
We are not giving any details on the respective cost saving activities that we have lined out here. So I cannot quantify it for you.
Okay. Thank you.
Thank you very much.
Thank you. And your next question comes from the line of Agnieszka Viela of Nordea. Please go ahead.
Thank you. I have a question on your organic growth performance against the market and then maybe we could zoom in into some regions specifically. If I look at Americas, for example, you have been outperforming the market by double digits for the next 5 quarters. Do you think that this outperformance will now diminish in H2? And then also a similar question on Japan where you have been underperforming the market.
What makes you believe that you will turn into outperformance in H2? Thank you.
Thank you. Of course, the outperformance prediction that we are giving is based on the order book market share that we the order intake market share that has built our order book over the last couple of years. And according to our predictions here is that we should start to see that outperformance starting in Japan towards the end of the year all in line with how we actually also got the market share gains in the new order intake. So it follows basically that, but with the 18 to 36 months delay and implementation time there as we said. And in Americas, we expect it to continue to outperform, but of course at significantly lower numbers as we now you could say, have come through for full year here from when the step up of launches started.
So you will see lower numbers in let's call it early launch regions in the second half of the year.
Perfect. Thank you.
Thank you.
Thank you. There are no further questions at this time. Please continue.
Thank you very much, Valerie. This ends today's call. But before we hang up, I would like say that we will continue to execute on our growing business volumes and our new opportunities. We will never we will have a never ending focus on quality and operational excellence. Also I would like to mention that our 3rd quarter earnings call is scheduled for Friday, October 25, 2019.
And thank you everyone for participating in today's call. We sincerely appreciate your continued interest in Autoliv and hope to have you on the next call. Goodbye for this time.
Thank you, sir. Ladies and gentlemen, that does conclude your conference for today. Thank you for